When it comes to borrowing money, there are plenty of options out there and it can be tricky to know which one may be best suited to you. A loan is an important decision, so it’s a good idea to do your research and keep an eye out for red flags that might land you in a difficult financial situation.
Here are some general red flags to look out for when borrowing.
1. High interest rates.
When applying for a loan, look out for unreasonably high-interest rates. Generally payday loans and ‘fast loans’ come with higher interest rates (even higher than credit cards), but their attractiveness stems from the idea of getting cash quickly. High interest rates can also impact your credit rating, which lenders could see as higher risk behaviour when assessing a loan application.
Financial institutions can charge very high fees and interest rates, especially on credit cards. Be aware of interest-free periods and offers that revert to high rates after a certain amount of time, often known as ‘honeymoon’ periods.
One way to pay down debt faster, especially if you have multiple credit cards is to chip away at it whenever you can. We built Wisr App to help people pay extra off their debt by rounding up daily purchases.
2. Non personalised rates.
When lenders don’t provide personalised interest rates, it means that everyone receives the same rate, regardless of their credit score and financial standing. Especially if you’re one to keep your finances in order and maintain excellent credit scores, receiving a rate not personalised to your situation could mean that you end up with a higher interest rate than you could get elsewhere.
Doing your research and keeping realistic expectations based on your own financial situation allows you to be more informed when deciding to apply for a loan.
3. Hidden fees and charges.
Be well versed on any additional fees or charges that may apply. This includes early repayment charges, servicing fees, default fees, extra repayment fees and annual fees. Sometimes these are buried in the terms and conditions and can be easily overlooked when you first apply. A quick tip here, is when comparing interest rates, don’t just compare the ‘headline’ interest rate a lender advertises, but also pay attention to what the ‘comparison rate’ is, as the comparison rate also considers ongoing recurring fees that may be applicable on the loan.
Be aware that accessing fast loans or pay-later services on a regular basis may lead to a cycle of bad debt.
4. Shorter terms.
This includes overdrafts, and extended lines of credit that have no specific repayment time. When borrowers are not able to pay back short term loans or fast money loans, lenders can renew loan terms with additional fees. Being on top of your repayments and doing your research upfront can save you from landing in a sticky situation. Shorter terms may be attractive on first appearance but can cost you more over time if you are not well informed.
5. Low doc or no doc applications.
All lenders in Australia are required to have an Australian Credit license and for those lending to consumers, need to comply with ‘Responsible lending’ in accordance with the National Consumer Credit Protection Act 2009 as well as ASIC’s Regulatory Guide 209. This means lenders are legally required to conduct a certain level of diligence about consumers applying for credit. At Wisr, responsible lending is extremely important to us.
At a high level, responsible lending obligations requires lenders to:
- Make reasonable inquiries about the consumer’s requirements and objectives in relation to the credit product;
- Make reasonable inquiries about the consumer’s financial situation; and
- Take reasonable steps to verify the consumer’s financial situation.
If you encounter a lender who doesn’t seem to be asking enough questions about your circumstances, you should be cautious about taking a loan with them. While it may seem easier to be asked less questions, you could end up paying a higher price and the loan may not be suitable to meet your requirements and objectives.
Because there are so many options out there, it’s wise to do your research to find the right lender for you.